New Loan Puts Borrowers, Lenders and Investors in Harmony

An innovative housing finance company is poised to introduce a new approach to mortgage lending, just when mortgage finance reform has put the future of the 30-year fixed rate mortgage in doubt.

The Northern Virginia-based company is called Mortgage Harmony Corp. and it has dubbed the new product the Harmony Loan. The adjustable-rate mortgage, after a period of seasoning, allows the borrower to reset his or her interest rate with a click of a button and a tiny amount of paperwork.

The company most recently partnered with Denver-based LenderLive, which will allow the Harmony Loan to become a regular part of LenderLive’s mortgage offerings. Currently, nine credit unions offer the product and two are the pipeline to do so, but were not ready to be announced as of press time, according to Ray Crosier, president of the firm.

Crosier said he and co-founder Keith Kelly, CEO of the company, came up with the idea for the product when considering how poorly traditional mortgage loans serve all of their stakeholders, from borrowers to lenders, and the investors who purchase them on the secondary market.

The two realized inflexibility weakened the loans most, because if mortgage rates decline, home owners often have no choice but to refinance their loans to try to get the lower rates. Those refinances, Crosier said, take the loan away from the original lender if it is holding or servicing it, and also takes it away from the investor, leading both to have to replace it–often at a high cost.

“This hurts everybody,” Crosier said. “The homeowner has to go through the pain and expense of taking out another loan when they really they don’t need one, they just want to take advantage of the lower rate. The originator usually sees that borrower make the new loan with another firm and the investor sees part of their investment paid off prematurely. Everybody loses.”

Crosier said he and Kelly hadn’t necessarily come up with anything new. Other mortgage firms, including Fannie Mae and Freddie Mac, have offered loans in the past that have allowed homeowners to reset their mortgage rate. But those efforts failed, Crosier said, because they didn’t consider the role of the loan officer, who are almost always paid for new loans originated.

“Why should a loan originator go out of the way to originate a loan where the homeowner is unlikely to refinance? That would cut (his or her) own future income stream,” Crosier said.

To counter this concern, Mortgage Harmony developed the Mortgage Annuity Revenue Stream. With MARS in place, a loan originator still receives his or her primary payment when the original loan is funded. But where this would end the income stream from a traditional loan, a HarmonyLoan opens an annuity stream of income for the life of the loan that begins when the homeowner first resets the interest rate. Now the HarmonyLoan does not cut off the income stream for the loan originator, Crosier said, but instead sustains it.

Marlisa Senchak has been a long-time mortgage executive for both banks and credit unions and is a member of the 21,000-member, $244 million Agriculture Federal Credit Union in Washington, D.C.. She is also in charge of product management for Harmony, a position she came to as soon as she heard the details of how the loans worked.

“I have been doing mortgage lending for years,” she said, “and as soon as I heard about this, I knew I had to learn more about it.”

And after the loans came to AFCU through its relationship with the Credit Union Mortgage Association, a housing finance and loan servicing CUSO based in Northern Virginia, she said she had to try one.

She got her opportunity when she and her husband bought a new home and financed it with a HarmonyLoan in December 2010. After making regular, timely payments for six months, Senchak and her husband were eligible to reset the rate for the loan and started paying attention to the rate published on the loan’s reset page.

Next Page: Resetting the Rate

“I didn’t pay much attention to it because interest rates were pretty low and steady at that time and I didn’t think they would go any lower,” Senchak said. “But then in June (2011) I noticed they started to slide again, and when one day I saw that the number had hit a number that I wanted to get, I pushed the button. It was that simple.”

Senchak added that there had been a small piece of paperwork. She had to acknowledge an email that asked if she really meant to change her rate and sign a rider to that effect, but she said the software program provided by the lender made that easy.

It was easy enough that roughly 18 months later, on Christmas Day in 2012 while traveling on vacation in England, Senchak reset the rate again.

‘There were some issues of getting internet access that worked,” she said. “Some firewalls had to be overcome, but once we had the page up, we clicked the button and it worked fine.”

Senchack said the HarmonyLoan has helped her see the mortgage as something she controlled and which could be an active part of financial planning, rather than something she just kept on a shelf until she brought it down to refinance.

The 202,000-member, $1.7 billion GTE Financial Federal Credit Union, headquartered in Tampa, Fla., is the latest credit union offer the HarmonyLoan. Aaron Bresko, chief lending officer, said as of press time, the credit union had four of the loans in the pipeline and had closed on its first.

Bresko said GTE Financial had opted for the loans both because members would want them and because they would help the credit union forestall refinances.

Since the HarmonyLoans have an adjustable rate, GTE keeps them on its books, and Bresko said the loans are likely to be ­long-term performers for the credit union at a time when loan volume and investment returns are down.

“We don’t expect HarmonyLoans to totally eliminate refinancing,” Bresko said. “There will always be some people who want to refinance to take money out, for example, but for people who only want a better rate, the HarmonyLoan is an excellent, innovative option.”